Life Insurance Tax Deductibility

Is my life cover policy tax deductible?

DISCLAIMER: This article contains general advice and does not consider your own personal circumstances. It is not tax advice and the general nature of this material may not be applicable to you. You should obtain professional advice and verify our interpretation before relying on the information contained in our article.

Life insurance in Australia is available as both a standalone retail policy or through a superannuation fund. Here is how tax treatment differs for these two forms of cover:

Life insurance outside of superTax treatment
Premium payments
  • Premium payments are not tax deductible
Benefit payouts
  • Benefit payments are generally not taxed
Life insurance funded through superTax treatment
Premium payments
  • Premium payments are typically fully tax deductible
Benefit payouts
  • Benefit payments can attract tax as high as 35% if they are paid to non-dependents

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Conditions of life cover tax deduction

If your life insurance is through your super fund your premiums are tax-deductible. The general rule is that life insurance premiums, outside of superannuation, are not tax deductible but the benefit from a successful claim is tax-free.

Rules inside super

Tax is deductible when you pay for your premiums with your pre-tax income. Your super fund can claim a tax deduction on premium payments which is then passed onto you.

Concessional contributions

When you pay for your premiums with pre-tax income, this is known as a concessional contribution.

There are some conditions and restrictions after the age of 65:

Concessional caps

Financial yearUnder 4949 to 5959+
2017/18$25,000$25,000$25,000
2016/17 (Current year)$30,000$35,000$35,000
2015/16$30,000$35,000$35,000
2014/15$30,000$35,000$35,000
2013/14$25,000$25,000$35,000
2012/13$25,000$25,000$25,000

Source: ATO. When looking at previous years, consider your age at after 30 June of that financial year.

For this reason you should make yourself aware of how much you're allowed to contribute to your superannuation so that all the rules governing your fund are complied with.

Although you should go to an experienced financial or taxation adviser to obtain qualified information on your life insurance tax deductibility for your individual situation, in most cases you are generally unable to claim any deductions off your taxation liabilities for any life insurance premiums you had paid in the previous financial year. The same applies to premiums paid for critical care insurance or trauma insurance, in fact any total and personal disablement type of insurance. On the other hand premiums paid for income protection policies are fully claimable and the benefits are taxable as part of your normal taxable income.

Tax deductibility of life insurance inside superannuation

When purchasing life insurance through your superannuation fund you can also have the total premium cost paid from the fund savings as non-concessional contributions therefore attracting taxation deductibility, or in the case of employees under a salary sacrifice arrangement. If you require an additional coverage, buying extra life insurance through the fund via a salary sacrifice agreement with your employer will be highly recommended. Self-employed people can get the same tax deductible result via their concessional contributions. In short, you will not have to pay any tax on the premiums paid for the life insurance under these circumstances, as long as you are inside the concessional contribution cap and the benefits paid from superannuation funds will be taxable.

It's also possible to take advantage of government concessions when you place your life insurance inside your superannuation fund such as the federal government co-contributions for spouse and low income worker contributions. These types of incentives are not available if you take out your term life insurance outside of your superannuation fund. Concessional contributions within your superannuation fund include:

  • Contributions provided by friends
  • Personal before tax contributions if you are self employed
  • Contributions regarded as being a "salary sacrifice"
  • Additional contributions made by your employer
  • Superannuation guarantee contributions

These contribution to your superannuation fund are treated as being part of the fund's assessable income and therefore become a taxable component within the fund generally.

On the other hand non-concessional contributions are contributions that are not included as part of the fund's assessable income and therefore constitute a tax-free component. These include:

  • Proceeds from any small business sale
  • Transfer of an overseas pension within six months of taking up residency in Australia
  • Spouse contributions
  • Personal contributions that you don't claim a tax deduction on
  • Government co-contributions
  • Any excess concessional contributions

Your personal contributions into your fund are only tax-deductible under the following conditions:

  • If you were under the age of 18 and earned your income from carrying on a business or from employment.
  • If the contribution is less than 10% of your assessable income, including fringe benefits for the one income year.
  • The superannuation fund must be a complying fund under the law.

It follows that if the benefits are taxable the premiums paid for the cover will be tax deductible whereas if the benefits are tax free the premiums will not be tax-deductible. It can be complicated and it cannot be stressed enough that in these cases you should seek out the advice of an expert in taxation matters to lead you in the right direction. You don't want to get your tax calculations wrong and end up having to pay money back to the ATO.

The rule governing these matters can be roughly interpreted this way: life insurance premiums are in effect capital outlays and not taken as being an expense that has come about in earning an income from a business undertaking. Therefore life insurance tax deductibility cannot be allowed under the rules governing the general limitation on payments in the nature of capital outlays.

Life insurance tax deductibility is allowed when the following circumstances apply:

  • When all or part of the premium has been collaterally assigned to a lending organisation, such as occurs when a mortgage is taken out and the lender requires such security.
  • If the life insurance proceeds are to be received by a charity. In these cases the person paying the premiums is entitled to tax credits that are non-refundable.
  • When the life insurance policy has been properly registered as a retirement savings plan, or superannuation fund plan. In this case part of the premium will attract life insurance tax deductibility.
  • When you are covered by group insurance the premium amount paid by your employer is tax-deductible.

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William Eve

Will is a personal finance writer for finder.com.au specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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2 Responses

  1. Default Gravatar
    byronMay 3, 2017

    can life insurance on a trustee of a discretionary trust be
    a business deduction to the trust although not tax deductible to the trust

    • Staff
      ZubairMay 3, 2017Staff

      Hi Byron,

      Thank you for your inquiry.

      Unfortunately, we are not authorised to provide financial advice regarding the taxation of life insurance via superannuation. It is worth speaking to a tax specialist or certified financial adviser.

      All the best,
      Zubair

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